LawFlash

A recent decision by the Court of Justice of the European Union on the ratification process for the European Union-Singapore Free Trade Agreement—intended to further improve Singaporean and European companies’ access to each other’s markets—could create uncertainty and affect anticipated growth in Singapore and the broader ASEAN region.

The EU-Singapore Free Trade Agreement (EUSFTA) is monumental for several reasons. From a historical perspective, it is the first FTA successfully negotiated between the EU and an Association of Southeast Asian Nations (ASEAN) country. In addition, it is a comprehensive agreement with provisions for the elimination of import duties and taxes, enhanced protection of intellectual property rights, improved market access for trade in services and establishment, and additional government procurement opportunities. In particular, the EUSFTA scores a first on two fronts by (1) eliminating import duties on most products and (2) including a chapter on renewable energy generation.

Negotiations for the trade deal between Singapore and the European Commission concluded in 2014. The EUSFTA was originally anticipated to require approval from the European Council and the European Parliament and was expected to enter into force in 2018 or 2019.

The Court’s Decision

Recently, the EUSFTA gained importance because it became the first European FTA—following the Lisbon Treaty—to be subject to a decision by the Court of Justice of the European Union (ECJ or “Court”) on the competencies of the EU to sign and conclude the envisaged agreement of its own accord (i.e., without individual EU member state ratification). The European Commission put the question to the Court and contended that the EU was so competent. The European Council and the governments of the member states submitted observations to the Court contending otherwise, i.e., that certain provisions of the EUSFTA fell within the shared competence of the EU and its member states or within the exclusive competence of the member states. If the Court ruled that the EU possessed the requisite competence, the EUSFTA could be concluded solely by the European Council with the consent of the European Parliament. If the Court ruled that the EU did not possess the requisite competence, the EUSFTA would require additional ratification by the EU member states according to each state’s national procedures.

The answer to the question put to the Court depended on whether the matters under the EUSFTA were all covered by the EU’s “Common Commercial Policy”—an instrument conferring exclusive competence on the Council—or were matters upon which the EU shared competence with its member states.

The ECJ determined on 16 May 2017 that there were two aspects of the EUSFTA for which the EU did not have exclusive competence—non-direct foreign investment and investor-state dispute settlement mechanisms. As a consequence, the EUSFTA in its current form may not be concluded by the EU alone and therefore also requires ratification by the EU member states.

Implications

Following the Court’s decision, Singapore's Ministry of Trade and Industry (MTI) said that Singapore is committed to working with the European Commission to ratify the EUSFTA expeditiously and to have it provisionally applied so that businesses might utilise the parts of the agreement that are under the EU's exclusive competence. The European Council has in the past provisionally applied EU-exclusive competency parts of an FTA pending member state ratification of shared competency provisions, as it has done with the Comprehensive Economic and Trade Agreement entered into with Canada.

Moving forward, the European Commission could choose to risk a veto by offering the EUSFTA in its present form for ratification. Alternatively, the European Commission could choose to split the trade deal into halves, one of which would contain the matters over which the European Commission has exclusive competence and the other which would need approval at national and regional levels. Embarking on either of these options is likely to pose a degree of uncertainty to investors and cause delay to economic progression before the issue is finally resolved.

According to the MTI, in 2014, EU-Singapore trade in services amounted to €36.1 billion, with the EU importing €15.7 billion worth of services from Singapore and exporting €20.4 billion. In 2015, total EU imports from Singapore reached €18.9 billion, while the EU exported €29.7 billion worth of goods to Singapore, resulting in a trade surplus of €10.8 billion in favour of the EU.

The EUSFTA was intended to further improve Singaporean and European companies’ access to each other’s markets and to provide a cost-effective, stable, and fair regime for foreign investors. However, until a final resolution is achieved, further progression of bilateral economic relations between Singapore and the EU could be delayed.

The EUSFTA provisions grant to Singapore, amongst others, access to city-level and municipal-level government procurement opportunities in the EU. Singapore companies with strength in computer and related services, telecommunications, land transport, maintenance and repair, sewage and refuse disposal, and architecture and engineering services will be the beneficiaries of those provisions—if and when they finally take effect.

The EUSFTA also was intended to make Singapore more attractive as a springboard for EU companies to serve the ASEAN market, promote Singapore as a regional headquarters for businesses, and boost the flow of investments through the country. At present, more than 10,000 EU companies have operations in Singapore and many of the companies use the country as regional headquarters to source and trade from the region. Anticipated growth in this area also might be dependent on when the uncertainty about the EUSFTA is resolved.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Suet-Fern Lee, a solicitor of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan Lewis & Bockius LLP.